In a move that was widely anticipated, the State Bank of Pakistan (SBP) left its policy rate unchanged
at 14.0% over the weekend. The upcoming FY2011-12 budget and subsequent fiscal developments
will be the key area to watch in determining monetary policy. We believe the policy rate should be
kept on hold or even cut to promote growth. However, there is a significant risk that progress on the
fiscal side goes into reverse later this year, which would likely bring renewed SBP tightening.
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